529 Plans

How to Use a 529 Plan When Your Child Wins a Scholarship

Even if your child wins a full scholarship, you can use money from a 529 college-savings plan for things other than tuition without triggering taxes or a penalty.

Question:

My daughter received a full volleyball scholarship to college, so we’re wondering what to do with her 529 college-savings plan. Can we withdraw the amount of the scholarship without penalty?

Answer: You can withdraw up to the amount of the scholarship without having to pay the 10% penalty, but you will have to pay taxes on the earnings. (A portion of each withdrawal is considered to be from principal, and a portion comes from earnings.)

But before you make a scholarship withdrawal, it’s a good idea to see if you can use the money tax-free for other eligible college expenses.

Besides tuition, you can use the 529 money tax-free for room and board. If your daughter lives on campus, the 529 money can cover the full cost of room and board paid to the college. Even if she lives off campus, she can spend the 529 dollars tax-free for her housing costs, up to the school’s allowance for room and board. (You can find the allowance amount on the school’s website under the cost of attendance or by contacting the financial aid office.) Off-campus room and board only counts if the student is enrolled at least half-time.

You can also withdraw the money tax-free for textbooks, fees, and required supplies and equipment. “Essentially, you can use the money for any expense that is required by the school,” says Kaellen Hessel, of the Oregon 529 Savings Network. “For example, if you are going to art school, then art supplies would be an allowed expense.” The money can also be used to buy a computer and software for your daughter, if she will need it for her schoolwork.

There’s no time or age limit for using the money. So even if your daughter doesn’t spend the money while she’s an undergraduate, she could use it later for graduate school. Or you could change the beneficiary to another eligible family member headed to college, including your daughter’s siblings, nieces, nephews, parents, aunts, uncles, spouse or in-laws. You could even keep the money in her name and ultimately transfer the beneficiary to her own children later. Your daughter could then use up to $10,000 per beneficiary each year to pay for tuition for kindergarten through 12th grade. Or, she can save the money until her kids need it for college.

See the “Qualified Tuition Program” section of IRS Publication 970, Tax Benefits for Education , for more information about the rules.

Most Popular

Senate Passes $3,000 Child Tax Credit for 2021
Coronavirus and Your Money

Senate Passes $3,000 Child Tax Credit for 2021

The provision would temporarily increase the child tax credit to $3,000 or $3,600 per child for most families and have 50% of it paid in advance by th…
March 6, 2021
Senate Passes Bill with More "Targeted" Stimulus Payments
Coronavirus and Your Money

Senate Passes Bill with More "Targeted" Stimulus Payments

The Senate finally passes the $1.9 trillion COVID-relief bill. But fewer people will get a third stimulus check under the Senate version than under th…
March 6, 2021
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021

Recommended

4 Ways Broke Grad Students Can Raise Their Income While Still in School
college

4 Ways Broke Grad Students Can Raise Their Income While Still in School

Grad students can lighten their financial loads by targeting specific opportunities as they complete their studies. Here are four places to start look…
February 10, 2021
Biden Extends Student Loan Relief, Is Loan Forgiveness Next?
Coronavirus and Your Money

Biden Extends Student Loan Relief, Is Loan Forgiveness Next?

On his first day as president, Joe Biden continued the suspension of student loan payments until October.
January 22, 2021
12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket
Coronavirus and Your Money

12 Ways the Biden Stimulus Package Could Put (or Keep) Money in Your Pocket

President Biden's "American Rescue Plan" includes several proposals to assist people financially harmed by the pandemic.
January 20, 2021
Will College Students Get a Second Stimulus Check? (Hint: It Depends!)
taxes

Will College Students Get a Second Stimulus Check? (Hint: It Depends!)

College students were shut out of the first round of stimulus payments, but they're hoping for a better deal with a second stimulus check.
December 28, 2020